Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
Cross-Appropriation: Developing Careful Interrelations to
Reduce the Risk of Fraud in Financial Markets
Emmanuel Lafforti and Emmanuelle Cargnello-Charlesii
Operators (fund managers and traders) are regularly involved in fraudulent
operations. Their cost amounted to over $40 billion in the last decade. We
think that one of the main reasons is related to the nature of interrelations
between risk-controllers and operators. Controllers are often too poorly skilled
(Janand) and operators consider themselves as superior human beings and
are therefore reluctant to explain themselves (Godechot). Existing structures
encourage this. That is why we propose an approach based on the concept of
enactment (de Vaujany, Weick), which will entail a morphogenesis of
structures (Archer). This will help operators realize that they are just ordinary
people, which will then help them suffer less from their working life (Tuckett).
As a result, they will develop careful interrelations, resulting in a lesser risk of
fraud (Weick). We also provide a tool to measure the quality of these
enactments and to perform them: the appropriation scales.
Field: Financial markets, Risk management
JEL Codes: G10 General Financial Markets,
G23; Institutional Investors,
G32 Financial Risk and Risk Management
Loss due to fraudulent operations amounted to 40 billion equivalent dollars over the past
ten years. We might think that particular actions have been undertaken since the recent
financial affairs (Iksil, Adoboli, Kerviel, Hubler…), especially in such a context of deep
economic and financial crisis. Besides, we cannot be sure that it has not been the case.
What we can just notice is that these actions have not proved remarkably effective:
because of fraud from operators 20 billion dollars have vanished in the last four years.
It seems that the prevailing mechanisms all have roughly the same origins: a need to
recover, an inability to change one’s mind when the market turns, too much self-esteem…
If those are the true mechanisms, are we equipped to offset them? Do we have the
necessary skills and tools?
In this paper, we will show that institutions and organizations (in market finance) may
encourage fraud, albeit unwittingly. We then propose an appropriation-related (de
Vaujany, 2006; Dechamp et al., 2006) or enactment-based (Sutcliffe et al., 2009 (2005);
Weick, 2001 (1977), 2001 (1988), 2009 (2003)) framework which will lead to new relations
within organizations. The core of this framework lies in the notion of “cross-appropriation”,
namely someone with peculiar skills (a risk-controller, for example) getting involved in
another field of competences strongly connected with their own (operators, for instance).
Lastly, we also provide a tool, the appropriation scales, in order to measure and conduct
these cross-appropriations.
i
Centre de Recherche en Gestion, Université de Pau et des Pays de l’Adour, France.
Email: emmanuel.laffort@univ-pau.fr
ii
Centre de Recherche en Gestion, Université de Pau et des Pays de l’Adour, France.
Email: emmanuelle.cargnello@univ-pau.fr
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
We are looking for ways to reduce the risk of fraud from operators (traders or fund
managers). While the pace of fraud doesn’t seem to slow down, the solution, if there is
any, might differ from that currently implemented. That is why we are saying that operators
and controllers have to work together in a new way, with more cooperation and less
opposition, as is mostly the case in financial markets.
To have a better understanding of our initial view we conducted semi-directive interviews
with operators (fund managers and traders). After building this framework and its
associated tool we submitted them to controllers in a second wave of semi-directives
interviews.
Defining Fraud
In this research we use the broad sense of the word “fraud”, following the conclusions of
the Basel Committee. This committee made the point that fraudulent operations are not
restricted to forbidden actions but are also a matter of governance (B.C.B.S, 2010a).
We distinguish between two kinds of rogue operators. The first relies on prohibited and
hidden actions taken by the operator while the second relies on actions that would be
prohibited if the embedded risk were correctly disclosed. The first category includes
Kerviel (loss of $7 billion for Société Générale); Hubler (loss of $9 billion for Morgan
Stanley) belongs to the second one. In the first case a lawsuit was filed by the company
against Kerviel while in the second one an arrangement was found between both parties
in which Hubler left the company with a couple of million dollars… But in both cases,
parties were abused, even if Hubler’s responsibility seems less clear. For Lewis (2010, p.
234), what Hubler was involved in was a concealed Ponzi Scheme…
That is why we consider all intentional operations as fraudulent


that have been explicitly forbidden by any local (decreed by the organization) or
global (belonging to the industry) rule (Kerviel case);
that would have been explicitly forbidden if all the stakeholders had had a clear
understanding of the embedded risk (Hubler case).
Risk Control and Risk of Fraud
Operational risk management has regularly been less funded than other aspects of risk
management. Perhaps, as Jezzini puts it (2005), because no money is offered in
exchange for managing this risk. Nevertheless, organizations have to actively manage it if
they want to lessen the risk of bankruptcy. Yet more important than that, regulators have
to be sure that this risk is properly managed to avoid systemic effects, like those we have
seen recently (A.M.F, 2010; B.C.B.S, 2010b; C.E.B.S, 2009, 2010a; O.E.C.D., 2010;
S.S.G., 2009). But because such awareness is relatively recent we can point out a few
risk factors:
1) Operational risk management is a recent discipline. As such, it has suffered from a
problem of definition. In particular, not everyone agrees on the reputation risk. As a
matter of fact, for Gautier-Gaillard and Pratlong (2011, p. 283) this is not a risk to be
managed as such because if you manage all your risks properly, you will save your
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
reputation. Despite possible definition problems, we can find a way of reducing the risk
of fraud because this risk is clearly identified. We are told to behave proactively in order
to anticipate this risk (C.E.B.S, 2010b, p. 6), which is why we propose to focus on the
cause of comportments in this work;
2) In spite of the numerous attempts to master this risk, it has not been stopped, not even
reduced if we consider how many billion dollars were lost in the last 4 years. If this risk
cannot be suppressed, it can be controlled, and, as we are told, “It should be fully
understood by regulators and other standard setters that effective risk management is
not about eliminating risk taking, which is a fundamental driving force in business and
entrepreneurship. The aim is to ensure that risks are understood, managed and, when
appropriate, communicated.” (O.E.C.D., 2010, p. 13). If the fraud is partly due to
psychological suffering, having more and more quantitative controls will have no effect;
3) There are many ways of reducing this risk of fraud. If financial institutions have primarily
favoured qualitative methodologies, today we have come back to qualitative valuations.
Controllers have proven to be insufficiently educated (Janand, 2011); organizations at
least need to be sure that controls are to be done by well-trained people. It is very
comfortable to deploy quantitative systems and to hide behind figures, especially when
you do not have a very precise idea of what is going on… Operators are highly critical of
controllers, so this is not only a question of control accuracy, but it also aims to give more
legitimacy to controllers. Our approach goes explicitly in this direction.
4) We can also see that there is a deliberate will not to control some “star operators”
(B.C.B.S, 2006, p. 14). That is often where the fraudulent spiral originates, and
organizations need to dispel any idea that operators may pertain to myth. This will
contribute to weakening the star system and to alleviating operators’ suffering (Tuckett,
2011, p. 169);
5) Managing operational risk now provides a way to immediately save money because it
permits to reduce equity capital (the required provision diminishes). Regulators now
allow qualitative methods to measure operational risk, even coupled with quantitative
ones (B.C.B.S, 2006, 2009; C.E.B.S, 2006, 2009). Our approach is therefore also
financially attractive;
6) In a report regarding financial stability the International Monetary Fund (I.M.F., 2007)
shows that even if quantitative models are all different, when markets are stressed they
make it worse because they force behaviors in the same way. This is a very well known
phenomenon (institutional isomorphism) shown by DiMaggio and Powell (1983). As our
approach is rather qualitative, it is not concerned by this effect.
The Environment of Operators
The notion of ego is essential to our question. We think that operators can have a strong
ego just because their working environment encourages it. This strong ego may raise egodefenses in a wrong way, which can lead to fraudulent operations.
1.1
The Ego
The ego of people with an operational activity is usually not considered as a potential
threat because it is often subordinated to organizational culture, and in case ego-defenses
will be activated in an inappropriate way, it will rarely be headed for a disaster. All is
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
different in financial markets: not only are operators able to expose themselves to huge
risks (far more than their company’s capital), but the organization itself (and the structures
around operators) also promotes individualistic behaviors. The culture of the organization
is partly focused on operators: to have the best results, the best performances and to
attract money, they try to hire the best operators and this is part of their communication.
They have to develop their own image in a sense that matches the myth. Operators are
then involved in this game where the best of them are seen and treated like stars. They
are then engaged in a vicious circle in which they must always do better to reach the
pinnacle of glory which is also required by financial companies as a way to always better
perform (Cramer et Jones, 2008; Galbraith, 1993, 2008 (1989); Godechot, 2005;
Kindleberger et Aliber, 2005; Lacoste, 2009).
1.2
Myth and Operator
Eliade wrote that myths tell incredible, but real stories. Because of their exceptional
character these stories involve exceptionally talented people, “Supernatural Beings” as
Eliade wrote (1963, p. 30). In his sociological study of financial markets (2005) Godechot
also reckons that traders are considered as belonging to a myth. In fact, some of them
have built huge fortunes from scratch, as is chanted throughout a book (Schwager, 2006)
that was successfully reedited over 20 years “[Trading] is one of the very few ways in
which an individual can start with a relatively small bankroll and actually become a
multimillionaire.” (Schwager, 2006, p. x). As far as Tuckett (2011) is concerned, the
psychological picture of operators is even more complex as they are institutionally driven
to create their own reality and are living in a divided state.
As a result, operators are exposed to high self-esteem and are prone to invoke egodefenses abnormally when things go wrong, which can lead to fraud. Because they are
living in a world of their own, operators are only partially aware of the gravity of their fault,
and are therefore all the more exposed to this risk…
The Notion of Appropriation
This notion is still blurred despite its importance, says Giraud (2009, p. 277). Thus, she
gives a general definition of it: “It signifies […] two things: (I) a utilization in line with the
prescriber’s intention; (ii) a local modification space where users can adapt this utilization
to their specific context, including drifting away from the initial prescription. This is
precisely the articulation between these two dimensions that defines appropriation” (2009,
p. 278).
Vaujany has developed a synthetic view of this notion and describes its dynamics, inspired
from the adaptive structuration theory (DeSanctis et Poole, 1994) with regard to the
dynamics of it, and from the morphogenetic approach (Archer, 1995, 2003) when it comes
to the description of the articulation between structures and actions. For Vaujany, in order
to understand appropriation we need to mobilize three interdependent perspectives: a
rational one, a psycho-cognitive one and a socio-political one (de Vaujany, 2006, p. 114).
He also distinguishes between three qualities of appropriation: “Legitimation”,
“Assimilation” and “Appropriation”.
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
The latter refers to the deep individual process contributing to the development of personal
identity (Jouët, 2000). Weick calls this enactment, and enactment “might serve as the
basis for an ideology of crisis prevention and management” (Weick, 2001 (1988), p. 234).
He defines ideology as “a relatively coherent set of beliefs that bind people together and
explain their worlds in terms of cause-and-effect relations” (Weick, 2001 (1988), p. 234).
Enactment is a pillar of sensemaking, which in turn enables the development of respectful
interactions (between individuals, an operator and a controller, for example). That can lead
to heedful interrelations (between groups, e.g. a group of operators and a group of
controllers). All of that will lessen the risk of fraud (Weick, 2009, pp. 154, 207).
Presentation of the Approach
Structures surrounding operators and controllers have scarcely evolved: operators are still
suffering, and increasingly so, from their divided state, as Tuckett (2011) claims, and are
tempted to see themselves as “Supernatural Beings” (Eliade, 1963). Relationships
between operators and controllers are tricky and the poor quality of cross-appropriations is
unlikely to make structures change.
Our proposal, as Weick puts it (2001 (1993)), is to develop a new way for operator to
interrelate with controllers. Skills must be enhanced in two directions: an acquisition of
new competences and a reorientation towards each other’s jobs. That’s what we call
“cross-appropriation”. Cross-appropriation can be represented as follows:
Figure 1: Cross-Appropriation
This figure presents analogies with Weick’s thinking: in order to move from respectful
interactions to heedful interrelations, he says that we have to “shift the […] domain and
size of [our] ignorance” (Weick, 2001 (1998), pp. 370-371).
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
To conduct these appropriations, we first have to define where we want them to be. We do
so by bringing into relief the organization’s weaknesses (with respect to the goals to be
reached) so that the reduction of these weaknesses may play an active role towards
heedful interrelations. We call such factors the Perceived Critical Factors (P.C.F.). At the
level of definition, we set the rules that will permit to assess the quality of appropriation of
each P.C.F. When they are all defined, we assess them and report the evaluations in the
purpose-built tools: the appropriation scales.
Figure 2: Appropriation scales
Our hypothesis is that a well-balanced appropriation scales with a good quality of crossappropriations refers to an organization with heedful interrelations and is, as such, less
vulnerable to the risk of fraud. All other things being equal, appropriating one’s own
environment generates specific abilities that are difficult to imitate (de Vaujany, 2008;
Weick, 2001 (1998)), as it is a very intimate process (Jouët, 2000). This approach will
then not only lead to less fraud but also to competitive advantage.
Conclusion
At the end of his book about emotional finance, Tuckett (2011) gives some ideas on
how structures in a financial environment might evolve. He says in particular that the
way economics is taught must change. It is necessary to explain how financial
markets work and not, as is the case, how they should work. He says that it is
important to take on board the importance of the psycho-sociological aspect of such
environments.
What we propose is in line with that position: we find it necessary that operators see
their job differently, as a normal one, of a less supernatural essence… Therefore, they
will be less tempted to behave as Heroes and controllers will consider them as normal
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Proceedings of 7th Global Business and Social Science Research Conference
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individuals. Hence, they could more easily develop heedful interrelations and reduce
the risk of fraud.
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